The Heavy Hand of Government Trumps Capitalism

“The Great Depression, like most other periods of severe unemployment, was produced by government mismanagement rather than by any inherent instability of the private economy.” Milton Friedman

If you read the financial press, you can almost hear the gurus scratching their heads. They study past business cycles and can’t understand why robust growth isn’t the order of the day. Since WWII, strong recoveries have always followed recessions. And the deeper the recession, the faster the climb back to prosperity. Considering the depth of our latest crash, we should be rip-roaring into the stratosphere by now. What’s going on?

All the supposed stimulants have failed. Since December of 2008, interest rates have been near zero. The Fed has pumped so much cash into the economy that all of our wallets ought to be bulging. Bail-outs have increased government control of whole industries. Congress rammed through a huge health care entitlement, and celebrated with the kind of fanfare befitting simultaneous victory over hunger, global warming, and the common cold. Despite horrific deficits, our dear Congress continues to throw money around like it was confetti. Yet unemployment stays embarrassingly high, productivity is anemic, everyone is husbanding resources, the stock markets are bouncing all over the place, confidence has sunk to new lows, and foreigners lecture us on irresponsible spending.

With one exception, we have lifted ourselves out of every downturn in the past two centuries. During the Great Depression we took the same actions as we are taking today—with the same results. You can’t spend your way to posterity, or California and Greece would be models for the rest of us. When the government applies emergency measures repeatedly, but bad behavior continues unabated, then shallow recessions turn into great recessions. Current inept government actions are making a longer, and possibly deeper, downturn inevitable.

The problem is that the political class doesn’t understand how a capitalist system works. Business cycles are as natural and as necessary as the change of seasons. Downturns are beneficial because they cleanse the system of crooks, incompetence, and excesses. But recessions scare politicians, so if something bad happens—like a .com bust, an Enron bankruptcy, a catastrophic terrorist attack, or a housing collapse—the answer is always the same: flood the world with dollars so nobody notices that something imploded on the way to a it’s going to be differentthis time world.

Beltway wise men believe easy money, massive spending, and cheap credit can cure any ill, except rolling a crash cart up to the economy doesn’t fix anything; it just buys time. The time could be spent applying strong medicine, but instead we’ve used it to party like there’ll never be a reckoning. Now we have a huge hangover. We can either keep trying to pet the dog that bit us or sober up and fly right.

If Americans insist that the government stand down from all this interference with our economy, we may temporarily suffer a worse recession, but it will be shorter and our recovery will look like the robust recoveries of the past. The alternative is a lost decade like the one the Japanese experienced after their real estate bubble burst.

We need to change course. Unfortunately, Bernanke keeps going back to the same elixir bottle for another dose of patent medicine. The real cure is easy to prescribe. We need to get back to basics. For the government, this means returning to founding principles. For the economy, it means allowing the best economic system ever invented to operate freely without the government acting like an indulgent parent. And for social issues, it means returning to traditional values.

We can fix this mess—for ourselves and our children—but it won’t be easy. The first step is to use your vote to tell our leaders to grow up and lead responsibly.